1971 (1) TMI 35 - HC - Income Tax

Assessee s transactions in shares in his individual capacity - loss suffered in share transaction must be treated as business loss

Issues Involved:
1. Whether the losses suffered by the assessee on the sale of shares in the relevant assessment years could be allowed as business losses.
2. Whether the assessee was a dealer in shares or an investor during the relevant assessment years.
3. The relevance of previous and subsequent assessment orders in determining the nature of the assessee's transactions.
4. The impact of the timing of share sales on the determination of the nature of the transactions.
5. The Tribunal's consideration of the assessee's transactions in private limited companies separately from those in public limited companies.

Detailed Analysis:

1. Allowability of Losses as Business Losses:
The primary question referred to the High Court was whether the losses amounting to Rs. 602, Rs. 91,778, and Rs. 9,897 suffered by the assessee on the sale of shares in the assessment years 1956-57, 1958-59, and 1959-60, respectively, could be allowed as deductions as business losses. The Tribunal had previously disallowed these losses, stating that the assessee was not carrying on any business in shares and that the sales were not effected in the course of any business. However, the High Court found that the Tribunal erred in its judgment by not considering the assessee's history of being taxed as a dealer in shares in previous and subsequent years.

2. Dealer in Shares vs. Investor:
The Tribunal had concluded that the assessee was not a dealer in shares during the relevant assessment years based on several factors, including the long intervals between purchase and sale of shares, lack of continuity in transactions, and the nature of the shares. However, the High Court noted that the assessee had been dealing in shares since 1941 and had been taxed as a dealer in shares in multiple assessment years, including 1942-43 to 1947-48, 1955-56, 1957-58, and from 1960-61 to 1962-63. This historical context was overlooked by the Tribunal, leading to an erroneous conclusion.

3. Relevance of Previous and Subsequent Assessment Orders:
The High Court emphasized that while there is no res judicata in tax matters, previous and subsequent assessment orders serve as "good and cogent evidence" of the nature of the assessee's transactions. The Tribunal's failure to consider these orders resulted in a flawed judgment. The High Court cited the Supreme Court's decision in Investment Ltd. v. Commissioner of Income-tax, which held that previous findings are significant and must be considered in subsequent assessments.

4. Timing of Share Sales:
The Tribunal had inferred that the dominant motive of the assessee's share sales was to save tax, particularly because many sales were effected towards the end of the accounting year. However, the High Court found this reasoning unconvincing. It pointed out that the timing of sales varied across the relevant years and that the motive to cut losses is a legitimate consideration for anyone dealing in shares. The High Court referenced the Supreme Court's observation in Commissioner of Income-tax v. A. Raman & Co., which stated that lawful tax avoidance is not prohibited.

5. Transactions in Private Limited Companies:
The Tribunal had made a distinction between the assessee's transactions in private limited companies and public limited companies, suggesting that the assessee was not a dealer in shares of private limited companies. However, the High Court found this distinction unjustified, noting that the bulk of the assessee's holdings were in public limited companies. The erroneous statement by the Appellate Assistant Commissioner that the bulk of the shareholdings were in private limited companies had influenced the Tribunal's view, leading to a misstatement in the Tribunal's judgment.

Conclusion:
The High Court concluded that the assessee was indeed a dealer in shares during the relevant assessment years and that the losses suffered on the sale of shares should be allowed as business losses. The Tribunal's judgment was found to be flawed due to its failure to consider relevant historical evidence and its erroneous conclusions based on misstatements. The High Court answered the referred question in the affirmative and directed the Commissioner to pay the costs of the assessee.

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